ECB’s Lane: No Contradiction Between Fighting Inflation and Economic Growth

8 November 2023

By David Barwick and Isabel Teles – RIGA (Econostream) – European Central Bank Executive Board member Philip Lane on Wednesday said that fighting inflation and economic growth were not mutually exclusive.

Speaking at the annual conference of Latvijas Banka, Lane said that ‘there’s no contradiction between being tough with inflation and allowing economic growth. We have to do this to allow the economy to grow.’

The drop in inflation to date from previous highs ‘is not something we should take a lot of comfort from’, he said, it largely being a natural result of the decline of energy prices from high levels.

‘Over the next year, inflation will probably still be around 3%, high 2s, low 3s … and it’s only in 2025 … that we will see a return to 2%.’, he said. Still, ‘the overall message here is that inflation will come back to 2%’, if the forecasts hold up, he said.

At the same time, to get to that, he said, ‘there’s a lot of distance still to cover’, with wage growth a key element of this.

‘Next year we need to see wages still grow more than normal, but to decelerate’, he said. ‘We need to see some of those wage increases absorbed by profits’ rather than to be reflected in higher prices.

Low inflation would favour higher economic growth, so reducing inflation was a very basic step in supporting more rapid expansion of the economy, he said. ‘And if inflation comes down, then these high interest rates won’t be forever’, he said.

Lane urged to ‘be more ambitious’ and aim for higher European economic growth rates.

‘In our forecast we think going into 2024, we are going back to typical growth rates to European economy, but we should not be satisfied because they’re not that high’, he said.

During the following panel discussion, Lane reiterated his expectations of 2024 economic growth. ‘[N]ext year the economy will grow in a kind of normal way’, he said. The ECB sees the economy ‘really kind of turning around from early 2024 onwards.’

Other comments by Lane during the panel included:

- ‘We need to see the deficits in Europe narrow. Not dramatically, but in a significant way.’

 - ‘Having inflation coming back from 10% to 3% was more supply policy than monetary policy.’

- ‘If the transmission is weaker, the injection of interest rates has to be stronger.’